Analysts: NSI remains dominant

The world's domain name sales leader yesterday forged agreements with the Commerce Department and the Internet Corporation for Assigned Names and Numbers (ICANN), the nonprofit company appointed to oversee administration of the domain name system. Under the agreement, Network Solutions conceded to recognize the nonprofit's rules of operation for registrars that sell Net names ending in ".com," ".net," and ".org."

The agreements signal the end of a long-standing impasse between ICANN and Network Solutions (NSI). Though ICANN was recognized by the U.S. government to manage the Net address system and to foster competition to NSI, the registrar had resisted submitting to ICANN's complete oversight.

ICANN therefore changed some of its accreditation rules to give NSI ways to mold and challenge its decisions. For its part, NSI agreed to keep its database of Net name registrants' contact information--the Whois--public, and to help fund the cash-strapped ICANN, for example.

For almost three years, the Clinton administration has been trying to transfer control of the Net's infrastructure away from the U.S. government and its contractor, NSI. The negotiations have been closely watched because domain names are the means by which Net users find information, services, and products.

Even though malfunctions in the changeover could threaten the stability of the Net, ICANN also is forging new rules regarding who can own a given name.

But the real impact of the agreements is that NSI's business is set to change dramatically. NSI is essentially expected to break into two pieces--one retail and one wholesale. And the company stands to make considerable profits on both sides, analysts say.

The break in its political wrangling, and prospects of new revenue streams, have driven NSI's shares up as much as 17 percent since the agreement was announced.

"This agreement doesn't penalize NSI at all," said J.P. Morgan analyst Raimundo Archibold. "It's a sigh of relief, because this governance issue has been hanging over the company, and now we can start to assess the company's prospects more clearly."

Direct sales vs. wholesale
Based on its agreements, which have to be officially adopted by ICANN at its November board meeting, NSI will still operate a so-called registrar that will compete with the wave of new companies accredited by ICANN, such as America Online.

NSI's registrar will use its 200 distribution channels--which include deals with Net access providers and Web site hosts, as well as its own site--to sell domain name registrations, which cost $70 for two years. NSI already has been doing this for more than six years, registering more than 5 million names, making it a billion-dollar company.

The other side of NSI will be known as its "registry." The government and ICANN have promised NSI a four-year contract, which could be stretched out to a total of eight years, to keep administering the Net's white pages. The white pages, like a phone book, match up domain names and the Internet protocol numbers behind them. This master list, which is stored on computers at NSI, makes it possible to find Web sites on the global network.

In return for keeping the Net address system running, NSI gets to charge its Net name sales competitors a wholesale price of $6 per registration. NSI has already started to implement this venture, allowing five companies to test a shared registration system that cost NSI $25 million to build.

Thus, because NSI runs the registry, competitors still have to give it a cut of their sales. This could mean a significant amount of money for NSI. Based on its current sales growth, NSI said it expects there will be a total of 140 million domains names registered by 2003.

But the government didn't want NSI to be able to have an unfair advantage over the emerging group of new registrars. So for NSI to keep the four-year contract to run the wholesale registry, it has to unload 75 percent of its stake in either the registry or the registrar.

The company has 18 months to separate the businesses.

An IPO candidate
"The registrar or registry can't advantage each other," said Brian O'Shaughnessy, an NSI spokesman. "We could sell one off to another company or spin it off as an [initial public offering]."

The wholesale registry is the prime spin-off candidate.

"Right now, all of those options are ahead of us," said Chris Clough, vice president of communications for the company. "The most probable option is to divest in the registry."

Analysts agree that the registry is the piece NSI should sell off. But even if NSI can only hold 25 percent of the registry, it will still be a healthy wholesale business.

"Whoever takes it on or buys this asset will see the value in that business," said James Pettit, an analyst at Hambrecht & Quist. "It really is a tremendous franchise."

If NSI doesn't split up the registry and registrar, the government could call for other companies to bid on the registry contract and could reset the wholesale price.

But that is unlikely, analysts say. NSI is expected to restructure, continue to dominate the market, and continue to make money.

"The key themes that came out of the agreement is that it assured NSI's long-term business in this market," Pettit said.